Paris Court of Appeal, No. 17/18900

Paris Court of Appeal, Pôle 1 - Chamber 1, 2 June 2020, No. 17/18900

SUBWAY INTERNATIONAL BV

Vs.

Mr. Y

On 30 January, 2013, Mr. Z Y signed a franchise agreement with the Dutch company Subway International BV (hereinafter Subway) for the operation a restaurant in Solesmes, Sarthe (France). This agreement provided for the application of Dutch law, the resolution of disputes by arbitration organized under the UNCITRAL Rules in New York and under the aegis of the International Centre for Dispute Resolution (ICDR), with use of the English language.

Invoking non-payment of royalties, Subway notified Mr. Y to terminate the contract on June 10, 2016 and commenced arbitration proceedings under the auspices of the IDRCC on 7 September 2016.

In an award issued in New York on March 20, 2017 and rectified on April 6, 2017, Mr. X, the sole arbitrator, found Mr. Y’s breaches to his obligations, ordered the termination of the franchise agreement, ordered the franchisee to pay the franchisor the sum of EUR 16,146.63, consisting of royalties of EUR 10,628.58 and advertising expenses of EUR 5,518.05, in addition to the administrative expenses and fees of the CIRD and the remuneration of the arbitrator, as well as to reimburse the franchisor for the expenses, fees and remuneration already incurred, ordered the return of the advertising material and prohibited any use of the identification elements of the Subway brand.

This sentence was declared enforceable by an order of the President of the Paris Tribunal de Grande Instance of 30 August 2017, against which Mr. Y appealed on 13 October 2017.

In the course of the appeal proceedings, Mr. Y requested that the status adviser stay the proceedings pending a final decision by the Paris Commercial Court, which had been petitioned of an application for the annulment of certain clauses of the franchise agreement by the Minister of the Economy and Finance pursuant to Article L. 442-6 III of the French Commercial Code. By order issued on 20 September 2018, the Preventive Investigating Judge dismissed the application.

By final submissions notified on 5 February 2020, Mr. Y first requested the revocation of the closing order issued on 12 December 2019 and the admission of his new entries, then asked the court to:

in limine litis,

• declare that the arbitral tribunal was not competent to rule, refuse recognition or enforceability of the arbitral award of March 24, 2017 and reform the exequatur order of 30 August 2017 with the enforceable formula on 31 August 2017,

• if the court considers it useful, pronounce a stay of proceedings pending a final decision to be taken by the Commercial Court of Paris to rule on the validity of the clauses relating to the applicable law and the competent courts in the event of a dispute stipulated in the Subway franchise agreements;

On the merits;

• declare that the principles of due process and equality of arms have been violated,

• declare the violation of international public order, refuse recognition or exequatur of the arbitral award of 20 March 2017 and reform the exequatur order of 30 August 2017, which is enforceable on 31 August 2017,

In any case,

• reject Subway International B.V.’s requests,

• order it to pay a compensation of EUR 6,000 on the basis of Article 700 of the Code of Civil Procedure,

• order it to pay the entire costs with distraction in favour of Mr B C in accordance with Article 699 of the Code of Civil Procedure.

By final form of order notified on 10 February 2020, Subway International BV (hereinafter ‘Subway’), a company incorporated under Dutch law, applied to the court to:

• dismiss all of Mr Y’s claims;

• reject his application for a stay of proceedings;

• declare that the arbitral tribunal had jurisdiction, that the principle of due proccess and the rights of defence, as well as international public policy, have been respected;

• declare the appeal filed by Mr. Y to be ill-founded;

• confirm the exequatur order issued on 30 August 2017 by the Paris Tribunal de Grande Instance;

• order Mr. Y to pay the sum of EUR 3,000 pursuant to Article 700 of the Code of Civil Procedure;

• order Mr. Y to pay the entire costs to be recovered in accordance with Article 699 of the Code of Civil Procedure.

REASONS:

As a preliminary point, it should be noted that the appellant’s request, contained in the submissions on the merits, for revocation of the closure order dated 12 December 2019, has already been granted by order of the Preventive Counsel dated 6 February 2020, and that the last subsmissions of the parties notified by RPVA on 5 February and 10 February 2020 respectively have already been admitted to the proceedings, the new closure having taken place on 13 February 2020. This request has therefore become irrelevant.

On the ground alleging lack of jurisdiction of the arbitral tribunal (Article 1520-1 of the Code of civil Procedure):

Mr. Y claims that the sole arbitrator was not competent to rule on the grounds of the invalidity and inapplicability of the arbitration clause, and that since the court of appeal has jurisdiction to find that the arbitration clause is liable to annulment under Article 1448 of the Code of Civil Procedure, it must principally refuse the exequatur of the arbitral award.

Mr. Y invokes the action of the Minister of the Economy and Finance, brought on the basis of Article L. 442-6 III of the Commercial Code, before the Commercial Court of Paris, aiming in particular to obtain the nullity of the clauses relating to the applicable law and the competent courts in the event of a dispute. He claims that his voluntary intervention in these proceedings was declared admissible by judgment delivered on 28 May 2019. He adds that if the Commercial Court of Paris declares the arbitration clause null and void, then the arbitration award will have been issued by an arbitrator with no jurisdiction, so that Subway will have no claim against him.

Mr. Y claims that the clauses of the contract relating to arbitration and the jurisdiction of a foreign judge, the applicable law and the language of the arbitration to settle a possible dispute, contribute to the imbalance between the rights and obligations of the parties and deprive the franchisee of the right to a fair trial.

Subway replied that, contrary to what the appellant claims, the jurisdiction of the Paris Commercial Court is still being discussed with respect to voluntary interveners and that under the jurisdiction-jurisdiction principle drawn from Article 1448 of the Code of Civil Procedure, only the arbitral tribunal may rule on its own jurisdiction.

Subway adds that the arbitral award has acquired the authority of res judicata and is protected by the principle of legal certainty which is an essential condition of a fair trial within the meaning of Article 6 § 1 of the European Convention on Human Rights, that the Ministry of Economy and Finance does not seek the annulment of the arbitration clause attached to the franchise contract.

The annulment judge shall review the decision of the arbitral tribunal on its jurisdiction, whether it has declared itself competent or not, by seeking all elements of law or fact that make it possible to assess the scope of the arbitration agreement and to deduce the consequences of this on the respect of the mission entrusted to the arbitrators.

The Franchise Agreement concluded between Subway and Mr. Y dated 30 January 2013 contains in Article 10, b) an arbitration clause according to which “(' ) b) Unless otherwise provided in this Agreement, any dispute arising out of this Agreement shall be submitted exclusively to arbitration organized in accordance with the Arbitration Rules of the United Nations Commission on International Trade Law (UNCITRAL) and under the auspices of the International Centre for Dispute Resolution […]”.

Firstly, under the terms of article 1448 of the Code of Civil Procedure, “Where a dispute arising out of an arbitration agreement is brought before a State court, the latter shall decline jurisdiction unless the arbitration tribunal has not yet been seised of the matter and the arbitration agreement is manifestly null and void or manifestly inapplicable”.

It is established that the arbitral tribunal was constituted on 25 October 2016, the date on which the arbitrator was appointed, that the Commercial Court of Paris was seized on 16 and 28 November 2016 by the Minister of the Economy and Finance and that Mr. Y did not voluntarily intervene in these proceedings until December 2017, after the service of the order for the enforcement of the arbitral award.

Therefore, as the arbitral tribunal rules by priority on its own jurisdiction, the question of the validity of the arbitration clause and, consequently, that of the arbitrator’s jurisdiction, can only be examined a posteriori when the Court of Appeal reviews the order of enforcement of the award on the basis of Article 1520-1° of the Code of Civil Procedure.

Furthermore, according to the principle of competence-competence, it is up to the arbitrator to rule, as a matter of priority, on his own jurisdiction, unless the arbitration clause is manifestly null or inapplicable, which cannot result solely from the fact that the mandatory provisions of Article L. 442-6 III of the Commercial Code are applicable.

Secondly, the arbitration clause is legally independent of the main contract containing it, so that the existence and effectiveness of the clause are assessed subject to the mandatory rules of French law and international public order, according to the common will of the parties, without the need to refer to a State law.

Consequently, the significant imbalance in the commercial relationship that would result from the general scheme of the franchise agreement, even if it is contrary to international public order, is without influence on its validity and does not preclude recourse to arbitration, and even if the Minister for the Economy and Finance before the Paris Commercial Court, in his conclusions filed on 2 September 2019 (Exhibit No. 42 produced by M. Y, pages 57 and 58), considers that the arbitration clause contributing to this imbalance must be annulled pursuant to Article L. 442-6 III of the Commercial Code.

Thirdly, the existence of an arbitration clause does not, by itself, deprive Mr. Y of access to the courts and to a fair hearing within the meaning of Article 6 § 1 of the European Convention on Human Rights and Mr. Y does not justify how his alleged impunity on the day of the implementation of the arbitration proceedings could affect the validity of the arbitration clause agreed between the parties.

In any event, the proceedings were initiated by Subway, which advanced the costs of the proceedings; the administrative costs and fees of the HRIC and the remuneration of the arbitrator, as fixed by the final award, amount to a total of USD 8,053. Mr. Y, who claims that he should have paid between 20,000 and 80,000 Euros to defend himself, does not produce any evidence to support this claim, nor denies the statements in the award (pages 7 and 8) that “the arbitration was conducted by correspondence, including e-mails and other written materials, a procedure in which the Respondent could easily have participated […]. … the Respondent could have requested a preliminary hearing and/or a documentary hearing which could have been conducted by telephone … the Respondent might not have had to leave his home or work to present his defence or explanations”. Moreover, he does not provide any evidence of his personal financial situation at the time of the arbitration, so that this grievance, in that it alleges deprivation of access to the judge and to a fair trial, is in fact lacking.

The ground alleging the incompetence of the arbitral tribunal must therefore be rejected.

On the application for a stay of proceedings

In the absence of a ruling that the sole arbitrator had wrongly declared himself competent, Mr. Y asked the court to stay the proceedings before the Commercial Court pending the outcome of the proceedings before the Commercial Court.

However, firstly, in its judgment of 21 January 2020, the Paris Commercial Court did not rule on the ground of lack of jurisdiction raised by Subway against the voluntary interveners, but stayed the proceedings on this issue, and secondly, on the basis of pure domestic law, the proceedings pending before the Commercial Court of Paris are not likely to influence the control exercised by the court pursuant to Article 1520 of the Code of Civil Procedure with regard to an award made abroad in international arbitration.

The application for a stay of proceedings will not be granted.

On the ground alleging infringement of the principles of due process (in french principe de la contradiction) and equality of arms (Articles 1520-4 and 1520-5 of the Code of Civil Procedure)

Mr. Y claims that the proceedings were conducted exclusively in English, that he was unaware of the charges brought against him by Subway and, above all, of the manner in which the proceedings before the arbitral tribunal were conducted, of his elementary rights to defend himself, which also contributed to his inability to obtain a fair trial, and that this ground of violation of the elementary principles of due process and equality of arms relating to procedural public policy suffices to have the exequatur order reformed.

However, the arbitration took place in English in accordance with the arbitration clause. Moreover, the use of English in the arbitration, even though it is not the appellant’s mother tongue, does not constitute an infringement of the principles of due process and equality of arms, since English was chosen by the parties in a commercial relationship of an international nature and Mr. Y was the addressee of all the acts of the arbitration proceedings, as is apparent from the award itself and the documents he produced (his exhibits 28 to 34).

This ground must therefore be rejected.

On the ground alleging breach of international public order (Article 1520-5 of the Code of Civil Procedure)

M. Y claims that the general principle of good faith enforcement of agreements comes under international public order, that the recognition or enforcement of this arbitral award is contrary to this general principle of public order, that indeed, Subway’s lack of loyalty in the performance of the contract is established, that no amicable process was accepted by Subway, not even the rescheduling of debts, that Subway continued to evaluate it through its development agent after the 20 March 2017 termination of the agreement to verify that it was still in compliance with the franchise agreement after the termination, only during this period, advertising royalties and royalties continued to be demanded by the franchisor even though no contract was still in effect, which Subway thus contributed to the aggravation of its franchisee’s indebtedness in respect of advertising royalties and royalties without any rights or title, which is exclusive of any contractual good faith and contrary to international public order.

The international public order with regard to which the judge’s control of the recognition or enforcement of the arbitral award is carried out has the meaning that the French legal system confers to it, i.e. the values and principles of the French legal system which cannot be disregarded even in an international context.

In reality, Mr. Y’s argument only tends to discuss the interpretation and the terms of execution of the contract and, under cover of the allegation of a violation of international public order resulting from Subway’s failure to perform its contractual obligations in good faith, only to obtain a review of the merits of the award which is not permitted by the exequatur judge.

This ground must therefore be dismissed.

It follows from all the above that the exequatur order must be confirmed.

On costs and compensation under Article 700 of the Code of Civil Procedure

The costs will be borne by Mr. Y, who is unsuccessful in all his claims and equity does not require that Article 700 of the Code of Civil Procedure be applied in favour of any of the parties.

FOR THESE REASONS:

Finds that Mr. Y’s application for revocation of the Closing Order dated 12 December 2019 has become without object,

Rejects the application for a stay of proceedings,

Confirms the order of the President of the Tribunal de Grande Instance de Paris of 30 August 2017 which conferred exequatur on the award issued between the parties on 20 March 2017 and rectified on 6 April 2017,

Rejects applications under Article 700 of the Code of Civil Procedure.

Orders Mr. Y to pay the costs which may be recovered in accordance with the provisions of Article 699 of the Code of Civil Procedure.